Stocks v. Bonds: What Happens When Prices Decouple?

Charter Trust Company

By Mark Ungewitter

July 9, 2013

Are today’s falling bond prices a sign of confidence in economic growth and earnings power? Or might higher bond yields derail the current equity bull market? While the answer is far from clear, history teaches us to be cautious when bond prices decline sharply during an extended equity rally.

The attached chart presents the S&P 500 back to 1955, noting instances when stock prices rallied more than 20% year-over-year while bond prices declined more than 10% year-over-year. While there are only four prior cases, the current set-up is flashing a warning. With long-term AAA-yields approaching 4.5% and GAAP multiples near 18x, bonds are once again becoming attractive relative to stocks.